One of the key themes identified in this year’s highly anticipated Spring Budget was the focus on economic growth. It became clear that a big part of Jeremy Hunt’s growth plan was to get people back to work – including early retirees. As a result, he made some major changes to pension allowances.
Here’s what you need to know:
- The pension annual allowance will increase from £40,000 to £60,000 from 6 April 2023.
- The money purchase annual allowance will increase from £4,000 to £10,000 from 6 April 2023.
- The minimum tapered annual allowance will for certain high earners will increase from £4,000 to £10,000 from 6 April 2023.
- The lifetime allowance will be abolished from 6 April 2024.
Pension Annual Allowance Changes
The pension annual allowance is the total amount you can save into your pension plans each year before you must pay an additional tax charge. This includes payments from you, your employer and any third party.
To date, the most you can normally save into private pension pots in one tax year before you start paying tax is £40,000. This is known as the ‘pensions annual allowance’. The Government has confirmed that this allowance will increase to £60,000 from 6 April 2023.
The existing three year carry forward rules will also still apply. This means that if you don’t use up your full annual allowance in a single tax year, you can carry forward the unused amount into any of the next three tax years.
Remember that you need to have enough relevant UK earnings (for example earned income), to be able to pay pension contributions that attract tax relief.
If you’re not sure how the new allowance will affect you, contact your pension provider, or contact us today for more information – info@exchangeaccountants.com
Money purchase annual allowance changes
If you access any taxable money from your pension plan – either through a drawdown arrangement or from cashing in your pension savings – then you may see your allowance reduce. This limit is known as the ‘money purchase annual allowance’.
The maximum annual tax-free amount you can save into a pension once you’ve taken money out of it will rise from £4,000 to £10,000 from 6 April. This will apply when you’ve started to draw an income from your pension via a drawdown plan, or take a taxable lump sum from your pension.
However, there are ways in which you can take money out of your pension and not trigger the money purchase allowance:
- If you take out your 25% tax-free lump sum and use the remainder of your pension savings to buy an annuity
- If you take out your 25% tax-free lump sum and start a drawdown plan, but don’t take an income from it
- You cash in a ‘small pot’, which is a pension worth £10,000 or less
- You take an unlimited amount from a defined benefit, or ‘final salary’, pension
If you’re thinking of withdrawing money from your pension, or just want general guidance, we are here to help. Contact us today on info@exchangeaccountants.com
Tapered Annual Allowance
The Tapered Annual Allowance impacts certain higher earners. This gradually reduces the amount you can save into your pension plan each tax year depending on your earnings. Your allowance wouldn’t reduce to any lower than £4,000. This lower limit will be increased to £10,000 in the new tax year.
The tapered annual allowance reduces your annual allowance if your total income in a year exceeds both a ‘threshold income’ of £200,000 and you have an ‘adjusted income’ above £240,000. The adjusted income threshold at which the allowance taper takes effect will also increase from £240,000 to £260,000 from April 6, 2023.
Whilst these changes will be welcomed by affected individuals, it is necessary to consider the detail of how these reforms might affect those with significant pension savings and relevant pension protections. We are here to help, so if you have any questions or queries, contact us today on info@exchangeaccountants.com
Abolition of Lifetime Allowance
One of the most eye-catching measures in Mr Hunt’s Budget came with the axing of the announcement that the Lifetime Allowance would be completely scrapped from 6 April 2024. This means that most people will be able to save more into a pension without facing higher rates of tax when they come to take an income from it. The current Lifetime Allowance is £1,073,100.
Until this officially comes into effect in April next year, the Government have also announced changes to the current tax charge when taking certain lump sums (a one-time payment from your pension) for those who exceed the lifetime allowance.
From 6 April 2023, the tax charge will be reduced from a fixed 55% to your marginal rate of income tax. By marginal rate, we mean the standard percentage of tax you pay based on your earned income – which is typically between 20-45%. You can check what your marginal rate of tax is here.
It is important to note that despite this change, you will still pay income tax when taking an income from your pension pot. You can currently take a tax-free lump sum of 25% of your fund value, or your remaining lifetime allowance (whichever is lower), until 6 April 2023. After this, the maximum amount you can take as a tax-free lump sum will be frozen at 25% of the 2022/23 lifetime allowance of £1,073,100, i.e. £268,275. Regular monthly or annual annuity or drawdown income payments will be taxed at your marginal rate of income tax.
Key Points
There is a lot of good news to digest from the budget in regards to your pension, but the key takeaway point of the pension changes is that you can now put more money into your pot tax free. If you own a limited company, this means you can use employer pension contributions to extract profits in a tax-efficient way.
This is because an employer contribution is an allowable business expense, meaning you get tax relief against corporation tax. This can be a game changer if your company profits are over £50,000.
From April 2023, corporation tax will be charged at a tapered effective rate of between 19% on firms with profits of up to £50,000 and 25% for those with profits over £250,000. As a result, paying £60,000 into a pension pot could bring down the rate of corporation tax you pay.
If you’d like advice on how to use your pension to make tax savings, book a consultation with us today by emailing info@exchangeaccountants.com or by calling us on 028 9263 4135.
